These Stocks Benefitted The Most From OPEC’s Production Cut

Friday, December 2, 2016 4:41

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From Zacks: The market has so long been habituated to persistently weak oil prices following an oversupplied commodity market. But instead of taking any step to lower output, all major producers went on swelling up their inventory, pushing crude to multiyear lows.

Finally, OPEC has reached a historic accord to curb output, indicating that energy players now want oil to recover from the insufferable pricing scenario.

OPEC Deal

This is the first time since 2008 that OPEC signed a deal to cut oil production. This is arguably the most crucial move in the energy sector this year to restore crude prices and oil has started shining again. West Texas Intermediate (WTI –Free Report) crude witnessed a more than 8% improvement to settle at $49.44 per barrel yesterday.

Per the accord, OPEC will lower its production by 1.2 million barrels per day (MMB/D) to 32.5 MMB/D – effective Jan 1, 2017. Notably, the production cut – almost 1% of worldwide output – is much more than what was projected by most analysts.

Saudi Arabia has shouldered most of the output cut. It will lower production by about 486,000 barrels per day. Iraq agreed to cut 210,000 barrels per day, which marks the second highest reduction.

Iran — the country that has the fourth-largest proven oil reserve in the world, as per its government — is exempted from the cut. This is because it is only this year that the country came out of its sanctions following the historic nuke deal it signed with the superpowers – U.S., Russia, Britain, Germany, France, China, and the EU – on Jul 14, 2015, in Vienna.

Investors should also know that non-OPEC players, including Russia, have showed willingness to cut production by 600,000 barrels per day. Of the total amount, Russia – the major oil producing player – alone will contribute 300,000 barrels to output cut.

What Does the Deal Mean for Oil Stocks?

Definitely, the deal is going to lift oil prices which are a positive for upstream oil players engaged in exploration and production activities. This is because the companies will be able to sell the commodity at higher prices and generate significant cash flows for shareholders.

The development on this front will also benefit drilling and oilfield services players. The higher the price of oil, the greater will be the number of rigs hired by upstream players for exploration activities. On top of that, oilfield companies will have more reasons to set up oil wells.

We have employed our proprietary screening methodology to pick seven stocks that have improved more than 10% since the announcement of the deal. The companies also carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Synergy Resources Corporation (SYRG – Free Report) – based in Denver, CO – is involved in operations that include exploitation, exploration, and production of oil and natural gas resources in Denver-Julesburg Basin in Colorado. The company gained more than 18% and carries a Zacks Rank #2.

Unit Corporation (UNT – Free Report) – based in Tulsa, OK – is involved in contract drilling activities primarily in the U.S. The company gained almost 17% and carries a Zacks Rank #2.

W&T Offshore, Inc. (WTI – Free Report) – headquartered in Houston, TX – is an upstream energy player involved in activities like exploitation and production of oil resources in the Gulf of Mexico. The company gained more than 10% and carries a Zacks Rank #2.

Bottom Line

It is a big question whether OPEC will enforce the cuts among its fellow member nations. The confusion arises as the cartel has a history of deviating from accords with members producing much more than the amount agreed upon.

Moreover, if the cartel is successful in enforcing the cut, U.S. shale producers will increase its market share by producing more oil at the expense of OPEC. In other words, U.S. frackers will capitalize on higher oil prices in response to the cut.